DA4387 Level I CFA Mock Exam 2018 Morning A

2018
CFA® EXAM REVIEW

MORNING
SESSION
LEVEL I CFA
®
MOCK EXAM
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Mock Exam
6
Mock Exam 6 – Morning Session – Questions
Questions 1–18 Ethical and Professional Standards
1. Which of the following statements is most accurate? The CFA Institute Code and Standards are
an example of:
A. rule-based standards.
B. principle-based standards.
C. government-mandated legislation.
2. Brian Milton, CFA, works as an equity analyst and has recently taken over the coverage of
North American bank research. The previous analyst for the sector has been promoted to VP
of equity research and has asked Milton to maintain recommendations for most of the covered
banks. As this is common practice in his firm, Milton agrees to this request. In maintaining the
recommendations, which of the following statements is most correct? Milton has:
A. violated CFA standards.

B. not violated CFA standards, as he is following company practices.
C. not violated CFA standards, as there is a reasonable basis for the recommendation.
3. In the bibliography for a manuscript titled Wealth Management in New Zealand by May Heung,
CFA, the following statements are included:
Statement 1: Heung has long been one of the premier investment professionals in New Zealand,
being one of the first in the country to complete the CFA program.
Statement 2: The CFA program is one of the most respected and prestigious investment
management designations in the world.
Statement 3: As a CFA, Heung has delivered expert investment advice to individuals and
institutions for over 20 years.
Which statement has most likely violated CFA standards?
A. Statement 1
B. Statement 2
C. Statement 3
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3
4. Carmichael Ho, CFA, is a broker at Far-West Securities LLC, where he earns a base salary plus a
portion of trade commissions above a minimum trade level. After receiving a number of internal
reports recommending to sell a particular holding, Ho decides it appropriate to swap this holding
with a more favorable company for most of his clients. This trade allows Ho to earn a substantial
bonus for the quarter. Which of the following statements is most accurate?
A. Ho has not violated the Code and Standards.

B. To remain compliant with the Codes and Standards, Ho should reject the bonus for the quarter.
C. To remain compliant with the Codes and Standards, Ho should include only one side of the trade
in bonus calculations.
5. Jason Stein, CFA, is the head of trading at Cumulo Asset Management (CAM). To facilitate
currency transactions for the various CAM portfolios, Stein currently uses the services of
Mountain FX, who consistently provides superior rates and spreads. A competitor company, Go
Currency Solutions, has recently sent Stein two box tickets to an major upcoming sporting event.
In order to avoid violating CFA Codes and Standards, which of the following actions is least
appropriate? Stein should:
A. not accept the tickets.

B. disclose the gift to his firm.
C. accept the tickets, but refuse to use the services of Go Currency Solutions.
6. Jessica Vine, CFA, works as a portfolio manager for a GIPS-compliant firm in Country X.
Investment performance regulations in Country X conflict with GIPS, and Vine is currently
preparing a performance presentation for the previous year. Which of the following actions
should Vine most likely follow? For any specific conflict, Vine should:
A. follow the stricter of either the local regulations or GIPS.

B. present performance figures under both the local regulations and GIPS.
C. adhere to local regulations and disclose the conflict in the presentation for GIPS compliance.
7. Benny Mao, CFA, is the compliance officer for Redmiser Wealth Management. New legislation
requires all financial service firms to disclose information for all clients who have transacted
more than $1 million in net assets overseas during the past 12 months. Due to the potential cost
to the firm of extrapolating out affected clients, and to be safe, Mao provides authorities with
information on all existing clients who have had overseas transactions in the past 12 months. Mao
has least likely:
A. complied with the CFA standards.

B. violated the CFA standards by reporting on more clients than necessary.
C. violated the CFA standards by including only existing client information.
4
8. Mikael Vincheyk, CFA, is the portfolio manager for a strong-performing micro-cap equity fund.
Each quarter, Vincheyk receives a 5% performance fee from the fund should it beat its benchmark
and hurdle rate. This quarter, the fund is close to achieving its performance bonus, but some poor
news just before the end of the quarter about one of its holdings, Evershine LLC, has caused the
fund to lose a substantial amount. Vincheyk decides to post on a blog his opinion that the market
reaction to this stock has been overblown. On the last day of the quarter, Vincheyk puts in a large
buy order for the stock, which is several multiples above the daily trade volume. As a result, the
stock price rebounds back to its previous level and he reduces the portfolio’s holding in Evershine
over the following few weeks. Vincheyk has most likely:
A. complied with CFA standards.

B. violated CFA standards relating to his blog post.
C. violated CFA standards relating to his trading in Evershine.
9. Regarding GIPS compliance, which of the following statements is most accurate? For periods on
or after 1 January 2011, reporting on total firm assets:
A. include all accounts of the firm.

B. can exclude non-fee paying accounts.
C. can exclude nondiscretionary accounts.
10. Henrietta Jessop, CFA, has received an allocation of shares in a new IPO for her wealth
management clients, of which three had requested to participate in the new listing. Due to an
oversubscription, the amounts requested cannot be met in full. Due to the popularity of the float,
two more clients have also requested some of the IPO allocation. Which of the following actions
is least likely a violation of CFA standards? Jessop could:
A. distribute the IPO shares evenly among the five clients.

B. allocate the IPO shares to the three initial clients as a pro-rata of their requested allocations.
C. allocate the minimum share allotment to the three initial clients and any excess allocation to
her personal account.
11. Carrie Phillps, CFA, manages the ABC Diversified Growth Fund, as well as the International
equity portfolios for various ABC clients and the model portfolio for international equities, which
is used by internal managers and external clients. In preparing GIPS-compliant performance data
for the ABC International equity composite, which of the following is least appropriate?
A. The composite may include the ABC model portfolio data.

B. The composite must include terminated portfolios in historical performance data.
C. The composite may include the international equity segment of the ABC Diversified Growth
Fund under strict circumstances.
5
12. The Haley Kumar Global Fund has been trading for the past 4 years and has recently become
GIPS compliant. In regard to presenting and reporting requirements, which of the following is
most correct?
A. The firm will have to wait 1 year to present its first GIPS compliant report.
B. After 1 year, the firm is required to present only 5 years of performance data ongoing.
C. The firm is required to increase the performance data for the fund every year by 1 year, until
it reaches 10 years of performance data.
13. Which of the following statements is most correct? An ethical decision-making framework:
A. can help reduce unexpected consequences.

B. is a tool to improve compliance with the law.
C. is redundant when employees follow the law.
14. Gerard Smoot, CFA, works as an asset consultant and resides in Patania, which is a small island
country with laws and regulations considered to be less strict than the CFA Code and Standards.
He has recently been hired to assist with fund manager selection for a company in Berenland,
a neighboring country with laws and regulations stricter than the CFA Code and Standards. If
Berenland law applies to his investment work, which of the following statements is most correct?
As a CFA member, Smoot must adhere to:
A. Patania law.
B. Berenland law.
C. CFA Code and Standards.
15. Monty Wordsmith, CFA, works as a portfolio manager and is currently putting together some
marketing material for a new fund strategy. The strategy of the fund is partly based on some
new external research into momentum drivers in illiquid securities, and in the material, he uses
a number of graphs he finds on a website, which he thinks might have been copied from the
external research article. Which of the following statements is most correct? To comply with CFA
standards, Wordsmith should:
A. reproduce the graphs with minor changes and make no citations.

B. cite only the website if he has not reviewed the original research article.
C. cite only the research article if he has found the graphs to be a reproduction from the
research article.
6
16. Ben Sosa, CFA, is an equity analyst for a large fund manager based in Boston. He is currently
researching MoreCover LLC, a manufacturer of roofing materials and is due to release an
updated recommendation report. Sosa is impressed with the board and its strategy and expects
the company to perform well. An industry analysis for the company shows that the construction
sector has some strong economic tailwinds with industry growth likely to be above average over
the coming 3 years. MoreCover has only one major competitor in North America, New England
Rooftops (NER) LLC, which has its main factory close to Sosa’s home. In a visit to a local store,
Sosa overhears two NER factory workers discussing their concerns about the state of the factory
and the overall discontent of the workforce. Sosa finishes his research report the following week
and upgrades MoreCover to a “Strong Buy” recommendation. Which of the following statements
is most correct? Sosa has:
A. not violated CFA standards.

B. violated CFA standards as he has no reasonable basis for his recommendation.
C. violated CFA standards as he has utilized nonpublic information in forming his
recommendation.
17. Keith Samuels, CFA, works for Beta Investments and Research (BIR) as an asset consultant.
BIR has been contracted to provide an independent asset consultant for the Southern Coast
Pension Scheme, and Samuels has been appointed as BIR’s representative. Which of the
following statements regarding his appointment is most correct? In his role as an asset consultant
to the pension fund, Samuel’s ultimate loyalty lies with:
A. his employer.
B. the pension fund.
C. the pension fund clients.
18. Veronika Chan, CFA, manages the fixed income portfolios of Poste Lever Investments (PLI), a
large fund manager based in London. She has recently been headhunted by a rival firm based in
Frankfurt and she is about to resign her position at PLI. Prior to resigning, she downloads the
various pricing models that she has created herself, and leaves behind the work of others. She
also makes a number of aggressive portfolio transactions in an effort to boost her final bonus
payment. While serving her “noncompete” period, she posts a message on her personal social
media account, thanking PLI and clients for the opportunity to work with them. In regard to her
conduct, Chan has least likely violated the CFA standards by:
A. downloading the pricing models.

B. making the portfolio transactions.
C. posting the social media message.
7
Questions 19–32 Quantitative Methods
19. Terrence Barnes, CFA, has calculated the effective annual yield on a security to be 24.62%. If he
has held the asset for 52 days and plans to hold onto it indefinitely, the holding period yield for
the past 52 days is closest to:
A. 3.2%
B. 3.6%
C. 24.6%
20. The probability of a recession in the next 3 years is deemed to be 32% and the probability of
both a recession occurring and a localized flood occurring over the next 3 years is estimated to be
26%. If the probability of a recession occurring given that a localized flood has occurred over the
next 3 years is 40%, the probability of either a recession or localized flood occurring in the next
3 years is closest to:
A. 71%
B. 92%
C. 98%
21. Which of the following statements is most correct? The ratio of the standard deviation of a set of
data to its mean is also known as:
A. the Sharpe ratio.

B. standard error.
C. the coefficient of variation.
22. A portfolio of two assets has the following characteristics:
Expected Annual Expected Annual

Weighting Return Standard Deviation
Security A 60% 9.70% 10.80%
Security B 40% 14.80% 19.20%
If the correlation between the two assets is expected be 38%, the annualized standard deviation
for the portfolio is closest to:
A. 1.1%
B. 7.3%
C. 10.3%
8
23. Fund manager A claims that it outperforms its relevant benchmark consistently. To test this claim,
a sample of 72 monthly excess returns is taken, with the sample producing a mean of 0.92% and
a variance of 0.0452%. Using a t-test to test this claim, the test statistic is closest to:
A. 3.7
B. 31.2
C. 172.7
24. Which of the following statements is most correct? In technical analysis, the change in polarity
principle might refer to:
A. a price trend changing direction.

B. a resistance level becoming a support level.
C. a price movement between support and resistance levels.
25. A structured bond product is expected to provide investors with a return of 9.5% per year with a
70% probability, or 3.3% per year with a 30% probability. The likelihood of earning 9.5% every
year for at least 4 of the next 5 years is closest to:
A. 36.0%
B. 49.0%
C. 52.8%
26. The following loan is to be repaid with equal monthly repayments over the next 10 years:
Loan amount $20,000

Interest rate 15.0% p.a.
Payment type Monthly, in arrears
The monthly repayment for this loan is closest to:
A. $191.67
B. $276.67
C. $322.67
9
27. The Delta X Fund has purchased the following equal lots of 2,000 shares over the past month:
Date Number of Shares Share Price

1 March 2,000 26.4
5 March 2,000 23.1
8 March 2,000 24.7
20 March 2,000 28.7
26 March 2,000 27.2
The harmonic mean price for the purchase of the shares is closest to:
A. $25.87
B. $26.02
C. $26.29
28. The Golden Diversified Fund is invested in the following asset classes:
Expected Expected Annual

Asset Class Weight Annual Return Standard Deviation
A 15% 9.7% 10.8%
B 26% 14.8% 19.2%
C 43% 7.2% 8.1%
D 9% 5.5% 4.2%
E 7% 8.9% 8.9%
The expected annual return of the portfolio is closest to:
A. 8.92%
B. 9.22%
C. 9.52%
29. Which of the following statements is least correct? The lognormal distribution is:
A. positively skewed.
B. is unbounded at its lower end.
C. frequently used to model asset price distributions.
30. Barry Figgins, CFA, is comparing the following projects for his firm:
• Project 1 has a negative NPV.

• Project 2 has a positive NPV.
• Project 3 has a positive NPV and an IRR lower than Project 2.
10
Given all these projects have the conventional cashflows and the same hurdle rate, which of the
following statements is least correct?
A. The IRR for Project 1 is negative.

B. Project 2’s IRR is greater than the hurdle rate.
C. Proceeding with Project 3 would be expected to increase the value of the firm.
31. Which of the following statements is most correct? A discrete random variable can only take:
A. a countable number of values.

B. a finite number of integer values.
C. a finite number of positive values.
32. A certain passive strategy randomly selects five stocks every month from the largest 15
companies on the local stock exchange. The first stock chosen receives the largest allocation of
investments with the last chosen receiving the least. Given that the order of selection is important,
how many different portfolios are possible each month?
A. 3,003
B. 360,360
C. 759,375
11
Questions 33–44 Economics
33. Which of the following statements is most correct? A market is likely to exhibit perfect
competition when:
A. sellers have market-pricing power.

B. each firm is perceived to produce goods or services with unique characteristics.
C. the share of each firm’s minimum efficient scale is small relative to market demand.
34. Which of the following statements is least correct? A limitation of the Consumer Price Index
(CPI) as a measure of inflation is:
A. its failure to adequately account for changes in product quality.

B. its bias toward newer products, which are likely to be more expensive.
C. that it tends to overestimate inflation where substitutes exist for goods experiencing price
rises.
35. A negative cross-price elasticity between two goods indicates that they are likely to be:
A. substitutes.
B. complements.
C. inferior goods.
36. Which of the following is least likely to be a limitation of monetary policy?
A. Policy transmission through the economy may be unsuccessful where the central banks lack
credibility.
B. Monetary policy mechanisms cannot easily control the willingness of banks to lend and
create credit.
C. A liquidity trap situation may form in which banks refuse to pass on interest rate changes to
borrowers and savers.
37. Which of the following statements is least correct? A government’s fiscal deficit can be funded by:
A. a trade surplus.
B. inflows of foreign savings.
C. savings from the private sector.
12
38. Country X has its own currency, $X, which is pegged to a basket of major currencies. The central
bank of Country X holds foreign currency reserves to cover the entire monetary base of the country
and it provides short-term liquidity to the monetary system when necessary. However, it cannot act
as a lender of last resort. Country X has most likely adopted which kind of currency regime?
A. Fixed parity system

B. Managed float system
C. Currency board system
39. The concrete industry in Country J has six suppliers with the following market structure:
Concrete Supplier Market Share (%)

1 39
2 26
3 13
4 12
5 7
6 3
To better compete with Supplier 1, Supplier 2 intends to merge with Supplier 3. Following the
merger, the Herfindahl-Hirschman Index (HHI) of the three largest firms is closest to:
A. 0.32
B. 0.78
C. 0.90
40. Which of the following statements is most correct? A leftward shift in the aggregate demand
curve may be caused by:
A. an increase in taxes.
B. a decrease in the exchange rate.
C. an increase in business confidence.
41. Which of the following criticisms of the Austrian School of Thought is least accurate?
A. The Austrian school does not offer a theory on business cycles.

B. The theory attributes economic booms and busts solely to government intervention.
C. In times of economic stress, history has shown that economies might not self-adjust back to
equilibrium.
13
42. Regarding the fiscal tools available to a government, which of the following statements is most
correct?
A. Direct taxes can be adjusted very quickly.

B. Capital spending has a bigger impact on spending than income tax cuts and is quick to
implement.
C. Tax cuts to the wealthy are likely to have a bigger impact on spending than transfer increases
to the poor.
43. Which of the following statements is least correct?
A. Gross domestic product (GDP) excludes goods produced by citizens outside of the country.
B. Gross national product (GNP) includes services produced by foreigners within the country.
C. Gross domestic product (GDP) is generally preferred by analysts over gross national product
(GNP).
44. Vernon Wallace, CFA, is based in Singapore and is looking to buy CAD in order to settle a
transaction with a Canadian supplier. The following rates are offered by Bank A and Bank B:
Currency Pair Bank A Bank B

USD-CAD 1.2076 1.2107
USD-SGP 1.3166 1.3195
If Wallace can only use separate banks for each currency pair, the cross-rate that Wallace should
transact at is closest to:
A. 1.0875
B. 1.0899
C. 1.0927
14
Questions 45–68 Financial Reporting and Analysis
45. Which of the following is not a mandatory financial statement under International Financial
Reporting Standards (IFRS)?
A. Income statement
B. Statement of cash flows
C. Statement of changes in equity
46. Which of the following is most accurate? Financial assets that are measured at cost or amortized
cost include:
(i) loans
(ii) derivatives
(iii) unlisted instruments
(iv) held-to-maturity investments
A. (i) and (ii) only

B. (iii) and (iv) only
C. (i), (iii), and (iv) only
47. Georgia Snow, CFA, is conducting research into GenCom LLC, a large company in the
telecommunications industry. In so doing, she compares the level of days receivables across
similar-sized companies in the industry across a number of years. Snow is most likely undertaking
which kind of company analysis?
A. Trend analysis
B. Common-size analysis
C. Cross-sectional analysis
48. Carrywell LLC, a luggage producer based in Dayton, Ohio, is preparing its annual financial
reports under US GAAP. There is concern that an older assembly line might need to be repaired
and the following information is produced:
• Cost = $1,400,000
• Accumulated depreciation = $ 920,000
• Estimated net sale value = $ 460,000
• Expected future net cash flow = $ 55,000 p.a.
• Life of equipment = 9 years
• Salvage value =$ 0
Based on this information, the impairment loss to be recognized by Carrywell is closest to:
A. $0
B. $20,000
C. $30,000
15
49. Victory Construction LLC leases a crane that would likely be in use for another 15 years. Under
which of the following circumstances might the lease most likely be classified as an operating
lease under US GAAP?
A. The lease term is 5 years.

B. A bargain purchase option exists.
C. The lessor gains ownership of the asset at the end of the lease.
50. Which of the following strategies might be used if a company wanted to reduce the level of
revenues it recognizes in the current period?
A. Increasing its allowance for sales returns

B. Reclassifying inventory as “sold but held”
C. Setting shipping terms as “FOB destination”
51. Which of the following statements regarding types of audit opinions is least correct?
A. An unqualified audit opinion states that the financial statements of the subject company have
been presented fairly.
B. An adverse audit opinion states that the financial position of the subject company is either
unsustainable or insolvent.
C. A disclaimer of opinion is issued when the auditor is not able to issue an opinion on the
financial statements of the subject company.
52. Bell Engines, a UK-based manufacturer has recently concluded the following transactions:
• Issued GBP 30 million in new bonds

• Purchased new factory for GBP 20 million
These transactions might best be described as:
A. financing activities only.

B. operating and investing activities, respectively.
C. financing and investing activities, respectively.
53. Constraints in meeting fundamental and supplementary qualitative characteristics of financial

report are least likely to include:
A. cost-benefit constraints.
B. conflicts between characteristics.
C. indifference of the users of financial information.
16
54. In regard to nonrecurring items, which of the following statements is most accurate? Income and
expense items that are unusual in nature, but that are likely to reoccur:
A. should be ignored when considering forecasts.

B. should be recorded as a separate line item under IFRS.
C. should be recorded as a separate line item under US GAAP.
55. Mizuho Machines has the following balance sheet items:
¥ Millions
Cash and cash equivalents 23
Accounts receivables 38
Accounts payables 30
Inventories 39
Short-term debt 12
Long-term debt 86
Equipment 140
Based on this information, Mizuho Machines’ quick ratio is closest to:
A. 0.55
B. 1.45
C. 1.88
56. In regard to the Statement of Cash Flows, which of the following statements is most correct?
Dividends received are classified as:
A. investing cash flows under both IFRS and US GAAP.

B. operating or financing cash flows under IFRS and financing cashflows under US GAAP.
C. operating or investing cash flows under IFRS and operating cashflows under US GAAP.
57. In the most recent year, Becker Superstores LLC produced net income of $356,000 and earnings
before interest and tax (EBIT) of $582,000. It had an EBIT margin of 12.7%, an asset turnover of
0.94 times, and leverage of 3.20. Based on this information, Becker Superstores’ return on assets
is closest to:
A. 7.3%
B. 19.5%
C. 23.4%
17
58. Charter Bien Asia (CBA) has accounted for inventories and sales over the past quarter as follows:
Month Units Purchased Purchase Price Units Sold Sale Price

1 180 $54 200 $90
2 240 $50 160 $105
3 120 $58 210 $85
If there were 120 units of inventory at the start of the quarter that was valued at $6,000, the gross
profit for the quarter under the weighted average cost method is closest to:
A. $22,470
B. $22,700
C. $23,190
59. Pure Health Diagnostics (PHD) has recently acquired a new MRI machine from a similar
business by exchanging with them two X-ray systems that are no longer in use. It costs PHD
EUR 2,000 to ship and install the secondhand MRI machine to make it ready for use. The cost of
the X-ray systems was EUR 120,000 each and one has accumulated depreciation of EUR 20,000
and the other has accumulated depreciation of EUR 15,000. If the fair value of the secondhand
MRI machine is EUR 204,000, which of the following statements is most correct?
A. PHD’s net assets will decrease.

B. PHD will recognize a gain on the income statement.
C. PHD will not recognize any gain or loss on the income statement.
60. Keamba Dockyards has purchased $240,000 worth of solar panels for their storage yards. The
solar panels are thought to have useful life of 10 years, after which they will be sold for $80,000.
The corporate tax rate in the country is 25% and the government is incentivizing such industrial
scale purchases by allowing companies to expense the entire cost of renewable energy assets
immediately. If Keamba Dockyards uses straight-line depreciation for such assets, and in relation
to the solar panel asset, which of the following statements is least correct?
A. Keamba Dockyard’s deferred tax liability at the end of 10 years will be $20,000.
B. Keamba Dockyard’s deferred tax liability in the first year will increase by $56,000.
C. Keamba Dockyard’s deferred tax liability in the second year will decrease by $56,000.
61. Phoenix Water issues $4 million par worth of 3-year bonds at a market rate of 8.5% p.a. The
interest expense from the bond for the company in Year 3 is closest to:
A. $266,189
B. $289,456
C. $313,364
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62. Which of the following is least likely to be a benefit of conservatism in regard to applying
accounting standards?
A. Protection for regulators.

B. Reduction in potential litigation.
C. Reduction in total income tax expense over time.
63. Company L’s total equity on the balance sheet at the end of the year is $3,200,000. Retained
earnings at the start of the year was $1,750,000 and the net profit for the year $400,000. If the
company retains 20% of earnings each year, the total amount of contributed capital for the
company is closest to:
A. $1,113,000
B. $1,370,000
C. $1,450,000
64. Company P’s net profit for the year is $38.5 million and it has the following shares outstanding:
• Ordinary shares
○ 2,125,000 weighted average shares outstanding
○ Dividend payout ratio of 75%
• Preference shares
○ 52,000 preference shares outstanding
○ Dividend of $45 per share
○ Convertible into ordinary shares at a ratio of 20:1
Based on this information, the diluted earnings per share (EPS) for the year for Company P is
closest to:
A. 9.1
B. 12.2
C. 17.0
65. If using the direct method, which of the following items is most likely to appear in the cash flows
from operating activities section of the Statement of Cash Flows?
A. Depreciation
B. Cash paid for interest
C. Decrease in tax payable
19
66. MKF Designer House has recently had to write down the value of its handbag inventory due
to low sales and poor market conditions. As a result of the write-down, which of the following
financial ratios for MKF is most likely to improve?
A. Current ratio
B. Asset turnover
C. Gross profit margin
67. Which of the following statements is most correct? The cost of an intangible asset with an
indefinite life is:
A. amortized over its useful life.

B. expensed in the year of purchase.
C. tested at least annually for impairment.
68. Which of the following is not one of the “4 Cs” of credit analysis?
A. Capital
B. Capacity
C. Covenants
20
Questions 69–77 Corporate Finance
69. Company D sells only one product and in the most recent quarter made sales of 15,000 units at
$260 each. The total variable costs for the quarter were $2,625,000 and total fixed costs were
$560,000. Furthermore, total financial costs for the quarter were $317,000 and the corporate tax
rate was 40%. Based on this information, Company D’s degree of operating leverage is closest to:
A. 1.78
B. 1.80
C. 3.20
70. Which of the following stakeholder groups is least likely to have operational influence of a
company?
A. Creditors
B. Managers
C. Regulators
71. Kelly Brokers (KB) is looking to raise GBP 480 million in new capital to finance a new joint
venture. If KB has a target debt-to-equity ratio of 60% for the project, the value of equity in the
new capital raising would be closest to:
A. GBP 192 million

B. GBP 288 million
C. GBP 300 million
72. Galaxy Hardware has average accounts payable for the year of $34,000, which corresponds
to supplier purchases of $480,000 for the year. If the number of days receivables for the year
was 52.7 and the number of days of inventory was 27.6, the cash conversion cycle for Galaxy
Hardware was closest to:
A. 54.4 days
B. 80.3 days
C. 106.2 days
73. Which of the following is least likely to be considered a nonmarket factor affecting stakeholder
relationships and corporate governance?
A. Media
B. The legal environment
C. Competition and takeover
21
74. Following the basic principles of capital budgeting, which of the following items is most likely to
be included in the cash flow analysis of a project?
A. Sunk costs
B. Opportunity costs
C. Before-tax cash flows
75. Jamestown Telecommunications (JT), based in the island nation of South Sensia, is in the process
of establishing the country’s first broadband network. JT has a debt-to-equity ratio of 0.90
and a marginal rate of tax 15%. A nearby broadband provider, MegaZone (MZ), has an equity
beta of 1.20, with a debt-to-equity ratio of 1.40 and a marginal rate of tax 25%. Based on this
information, the equity beta for JT’s broadband project is closest to:
A. 0.59
B. 1.03
C. 1.20
76. Company Y sells one product and has the following expected sales and costs information for the
following year:
Sale price $1.80 per unit

Contribution margin $0.36 per unit
Fixed sales costs $42,000
Fixed nonsales costs $66,000
Based on this information, the breakeven level of revenues is closest to:
A. $300,000
B. $432,000
C. $540,000
77. Pentahex Solutions (PS) decides to issue $3 million in commercial paper at 7.5% for one month.
The dealer’s commission on the issue is 0.3% and it has a backup line of credit cost of 0.4%. The
cost of the commercial paper in % p.a. is closest to:
A. 8.20%
B. 8.25%
C. 8.31%
22
Questions 78–85 Portfolio Management and Wealth Planning
78. The annual change in Country V’s level of GDP and currency ($V) against a basket of trade-
weighted currencies is given below.
Year ΔGDP Δ$ GDP − GDP $V − $V

1 4.70% −2.50% 1.40% −3.72%
2 3.60% 8.70% 0.30% 7.48%
3 −1.30% 4.30% −4.60% 3.08%
4 6.40% −8.60% 3.10% −9.82%
5 3.10% 4.20% −0.20% 2.98%
Given this information, the sample covariance between the change in GDP and the change in $V
is closest to:
A. −61.85%
B. −0.12%
C. 1.95%
79. Which of the following is least likely to be a constraint for an investment trust that has been
established for an infant for the strict use of buying their first home?
A. Liquidity
B. Tax concerns
C. Unique circumstances
80. Which of the following statements is least correct? Bond index construction can be more difficult
than equity index construction because:
A. there are more equity issues.

B. the bond price discovery process is less effective.
C. specific bonds are likely to move between different indexes.
81. Which of the following statements is most correct? Exchange-traded funds (ETFs) differ from
index mutual funds as:
A. ETFs are more tax-effective.

B. mutual funds have lower fees.
C. mutual funds pay out all dividends received.
23
82. Good risk governance practices in an organization should:
(i) focus on enterprise risk management

(ii) provide for the appointment of a chief risk officer
(iii) provide for a risk management committee
(iv) give clear guidance to management.
A. Only (i), (ii), and (iv) are correct.

B. Only (ii), (iii), and (iv) are correct.
C. (i), (ii), (iii), and (iv) are all correct.
83. Ingrid Jolley, CFA, has put together a constrained efficient frontier (no short sales) of five risky
assets based on expected returns, volatility, and correlations of the risky assets. Asset E has the
highest expected return and standard deviation of returns of 13.5% p.a. and 16.2% p.a. However,
Jolley wishes to put together a portfolio with an expected return greater than 13.5% p.a. but with
an expected volatility of no more than 13.5% p.a. This objective might best be achieved by:
A. borrowing and investing in Asset E.

B. including a long position in the risk-free asset.
C. borrowing and investing in a portfolio of the risk assets.
84. Company X, Company Y, and Company Z have the following expected return characteristics:
Expected Return Variance Correlation with

(p.a.) (p.a.) Market
X 13.60% 2.27% 0.52
Y 7.90% 1.28% 0.68
Z 9.40% 1.41% 0.65
If the market has a variance of 1.54%, the company with the highest market beta is:
A. Company X.
B. Company Y.
C. Company Z.
85. Which of the following markets is most likely to exhibit semi-strong form efficiency?
A. Stock market in a country with no laws against insider trading

B. Corporate bond market where all issuers are required to have a credit rating
C. Commodity futures market where most trading is based on technical analysis
24
Questions 86–97 Equity Investments
86. Regarding current industry classification systems, which of the following statements is most
accurate? Industry Classification Benchmark (ICB):
A. classifies companies based on their primary sources of revenues.

B. classifies industries according to their principal business activity.
C. classifies industries on the basis of goods and/or services produced.
87. Power Build Constructions (PCB) has just declared an annual dividend of EUR 4.86 per share,
with dividends expected to grow at 3.9% p.a. indefinitely. PCB has a beta of 1.3 and the risk-free
rate is currently 2.3%. If the required rate of return for investors in PCB shares is 11.2% p.a., the
intrinsic value of PCB per share is closest to:
A. EUR 56.74
B. EUR 66.58
C. EUR 69.17
88. Which of the following is not a common type of publicly traded preference share?
A. Noncumulative
B. Nonredeemable
C. Nonparticipating
89. Which of the following statements is most accurate? Market share stability:
A. decreases as barriers to entry increase.

B. increases as industry competition decreases.
C. increases as frequency of new products into the market increase.
90. An investor is considering the purchase of stock in Company H and expects the following
dividends at the end of each of the next 3 years:
Year 1 $10.50 per share

He expects to sell the stock for $306 per share in 3 years’ time and he requires a required rate of
return of 12% p.a. to invest in the company. If Company H’s shares are currently trading at $259,
the investor will most likely consider the stock to be:
A. overvalued.
B. undervalued.
C. fairly valued.
25
91. The following financial information relates to Company Q:
Net assets $53,400,000

Debt $19,700,000
Common stock ($) $10,800,000
Common stock outstanding 10,000,000
Preference shares ($) $2,500,000
Preference shares outstanding 50,000
If the current share price is $11.65 per share, Company Q’s price to book value is closest to:
A. 2.4
B. 2.5
C. 4.0
92. Max Spiller, CFA, is the portfolio manager for a large private equity firm based in Vancouver,
Canada. Most of Spiller’s transactions involve investing in public companies at significant
discounts and gaining significant influence over the business operations. Spiller and his firm are
most likely to attract which type of private equity investor?
A. Leveraged buyout fund

B. Management buyout fund
C. Private investment in public equity fund
93. Which of the following is not one of Porter’s “five forces” framework?
A. Intensity of rivalry
B. Macroeconomic influences
C. Bargaining power of suppliers
94. May Johansson, CFA, is considering an investment in Best Sell Technologies LLC (BST), an
online retailer based in San Diego, California. BST has recently started to pay dividends with
a payout ratio of 30%. The company is expected to grow rapidly over the next 5 years before
earnings are expected to moderate. If Johansson intends to hold shares in BST indefinitely, which
of the following share valuation models would be most appropriate?
A. Two-stage dividend discount model

B. Gordon (constant) growth dividend discount model
C. Multiple-year holding period dividend discount model
26
95. Consider the following companies:
• Company G, a gold mining company with known reserves

• Company H, a hotelier that has grown predominantly through acquiring smaller hotel chains
• Company I, an internet provider that is currently being liquidated
For which of these companies would an asset-based valuation be least appropriate?
A. Company G
B. Company H
C. Company I
96. Company Z has just paid their annual dividend and its shares are trading on a P/E ratio of 17.7.
Next year’s dividend is expected to be $16.89 per share, which is expected to grow at 3.4%
indefinitely. If the current share price is $245.25, the market required rate of return for the stock
is closest to:
A. 10.1%
B. 10.3%
C. 10.5%
97. The EV/EBITDA metric is a common input of which type of valuation model?
A. Multiplier model
B. Present value model
C. Asset-based valuation model
27
Questions 98–109 Fixed Income
98. Company R has just issued a new 3-year bond, which pays an annual 6% coupon with
par value of $100 per bond. If it is priced at yield of 7.8% p.a, the bond’s Macauley duration is
closest to:
A. 2.8
B. 3.0
C. 3.4
99. Which of the following statements is most correct? Sovereign bonds:
A. are backed by the sovereign’s banking industry.

B. can be issued only in the sovereign’s domestic currency.
C. are issued in different forms including floating-rate and inflation-linked.
100. Mark Bael, CFA, calculates a spread of the yield on an international corporate issuer over its
Government’s bond yield by using individual spot rates to discount each of the bond’s expected
cash flows. Bael is most likely calculating:
A. a G-spread.
B. a Z-spread.
C. an I-spread.
101. Which of the following is least likely to be included in a bond indenture?
A. Collaterals
B. Issue price
C. Credit enhancements
102. The government of Santaria has recently issued 7-year bonds that pay a semi-annual coupon of
10% p.a. The par value of the bonds is $S 100 and they have a maturity value of $S 120 each.
If the market discount rate for the bonds at issue is 11.5% p.a., the issue price of the bonds is
closest to:
A. $S 92.920
B. $S 102.063
C. $S 111.503
28
103. Bond D, which pays a quarterly coupon of $24 per bond, will mature at its par value of $1,000
in 4 years’ time. If the current price is $1,087 per bond, the effective annual yield on the bond is
closest to:
A. 7.1%
B. 7.3%
C. 9.6%
104. Regarding asset-backed securities (ABS) made up of a portfolio of loans, which of the following
statements is most correct? The issuer of the ABS:
A. buys the loans.

B. services the loans.
C. originates the loans.
105. Which of the following statements is most correct? An investor’s realized rate of return on a
corporate bond that is expected to be held to maturity and not expected to default will equal the
bond’s yield to maturity if:
A. interest rates remain stable.

B. the bond is bought at par value.
C. the bond is a zero-coupon bond.
106. Makken Hellmut (MH) is a large Austrian manufacturer who is looking at issuing bonds to
expand its operations in Europe and the UK. To do so, MH issues bonds denominated in GBP
in both the Eurobond market and the UK domestic bond market. These bonds would best be
described as:
A. global bonds.
B. foreign bonds.
C. euro sterling bonds.
107. Country R issues a series of inflation-linked bonds that do not pay a coupon, but instead pay
an annual amount to bond holders that represents both payment of interest and repayment of
principal. This type of bond is best specified as a(n):
A. capital-indexed bond.
B. indexed-annuity bond.
C. zero-coupon-indexed bond.
29
108. Company JKL issues a 5% coupon, 10-year callable bond, which has a single call date at the end
of year 5. The issue price of the bond is $978.25 and it has a par value of $1,000. If the call price
in % terms is 106.550, the call premium at the year-5 call date is closest to:
A. $42.22
B. $65.50
C. $106.55
109. Which of the following statements regarding repurchase agreements is most correct?
A. Only the seller faces counterparty credit risk.

B. Only the buyer faces counterparty credit risk.
C. Repo rates increase as the level of credit risk in the collateral increases.
30
Questions 110–115 Derivatives
110. Colleen O’Farrell, CFA, sells 4,000 equity index futures contracts at a price of EUR 224 per
contract. She is required to provide an initial margin of EUR 20 per contract and meet margin
calls when her margin balance falls below the maintenance margin level of EUR 12 per contract.
In the event of a margin call, the exchange requires additional margin to be contributed up to the
maintenance margin level. The price of the contract over the first, second, and third days is as
follows:
Day Beginning Price Closing Price

1 224 234
2 234 248
3 248 230
Based on this information, the balance in O’Farrell’s margin account at the end of Day 3 is
closest to:
A. EUR 56,000
B. EUR 104,000
C. EUR 120,000
111. Which of the following statements is least correct? A credit default swap is a:
A. credit derivative.
B. contingent claim.
C. forward commitment.
112. Which of the following is least likely to be the reason for an arbitrage opportunity to remain
unexploited?
A. Significant transaction costs

B. Difficulty in entering short positions
C. Ethical objections to taking advantage of mispricings
113. Satoshi Takada, CFA, takes a long position in a 9-month equity forward contract with a forward
price of JPY 1684.20 per share. After four months, the share price has increased to JPY 2087.54
and the annual risk-free rate is currently 1.44%. Based on this information the value of the
forward contract to Takada is closest to:
A. JPY 0.00
B. JPY 413.34
C. JPY 433.23
31
114. Company XYZ has a $40 million, 3-year debt on which it pays a fixed rate of interest at 7.6%
p.a. As it is expecting rates to drop significantly over the coming few years it enters into a
swap contract with a fixed leg of 4.0% p.a. and a floating leg at 90-day LIBOR + 1.8% p.a. The
notional value of the swap contract is $40,000,000 and it is based on a 360-day year. If LIBOR
on Day 360 is 1.3% p.a., which of the following statements is least correct? The 90-day LIBOR
rate on Day 360 corresponds with a swap payment:
A. of $690,000.
B. made on Day 450.
C. to Company XYZ.
115. An investor is considering purchasing 1-year call options in dallanium, which is currently trading
at $566.20 per oz. The price of dallanium after one year will be either up by 20% or down by
10% and the only available call option has a strike price of $600 per oz. If the risk-free rate is
3.2% p.a., the value of the call option is closest to:
A. $0.00
B. $33.87
C. $79.44
32
Questions 116–120 Alternative Investments
116. Which of the following statements is least correct? In addition to management fees, a leveraged
buyout (LBO) firm may also charge:
A. incentive fees.
B. underwriting fees.
C. a fee if the deal falls through.
117. Missy Cohen, CFA, is a portfolio manager for a small hedge fund based in Phoenix, Arizona.
Using internally developed data sets and models, Cohen looks to invest in the securities of
companies that are engaged in restructuring activities. The type of hedge fund strategy employed
by Cohen is best described as:
A. macro.
B. event-driven.
C. relative value.
118. Which of the following is not a common characteristic of alternative investments?
A. Large investment size

B. Limited historical return data
C. Broad manager specialization
119. Which of the following is not a common risk measurement tool employed by managers of illiquid
assets?
A. Sortino ratio
B. Value at risk
C. Systematic risk
120. Joel Kelly, CFA, is the portfolio manager for the SureWall Direct Property Fund and is currently
reviewing several properties owned by the fund. The largest property in the fund is a three-story
security facility near Lisbon, Portugal, which is leased by a large technology company to house
data servers and records. The property is unique in that most other technology companies in
Europe own their server centers. Which of the following valuation approaches would be least
appropriate for Kelly to use in valuing this property?
A. Replacement cost
B. Comparable sales
C. Discounted cash flow
33
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2018

CFA® EXAM REVIEW

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Questions 1–18 Ethical and Professional Standards

A. violated CFA standards.

Which statement has most likely violated CFA standards?

A. Ho has not violated the Code and Standards.

A. not accept the tickets.

A. follow the stricter of either the local regulations or GIPS.

A. complied with the CFA standards.

A. complied with CFA standards.

A. include all accounts of the firm.

A. distribute the IPO shares evenly among the five clients.

A. The composite may include the ABC model portfolio data.

A. can help reduce unexpected consequences.

A. reproduce the graphs with minor changes and make no citations.

A. not violated CFA standards.

A. downloading the pricing models.

A. the Sharpe ratio.

22. A portfolio of two assets has the following characteristics:

Expected Annual Expected Annual

A. a price trend changing direction.

Loan amount $20,000

The monthly repayment for this loan is closest to:

Date Number of Shares Share Price

Expected Expected Annual

The expected annual return of the portfolio is closest to:

• Project 1 has a negative NPV.

A. The IRR for Project 1 is negative.

A. a countable number of values.

A. sellers have market-pricing power.

A. its failure to adequately account for changes in product quality.

36. Which of the following is least likely to be a limitation of monetary policy?

A. Fixed parity system

Concrete Supplier Market Share (%)

A. The Austrian school does not offer a theory on business cycles.

A. Direct taxes can be adjusted very quickly.

43. Which of the following statements is least correct?

Currency Pair Bank A Bank B

A. (i) and (ii) only

A. The lease term is 5 years.

A. Increasing its allowance for sales returns

• Issued GBP 30 million in new bonds

These transactions might best be described as:

A. financing activities only.

53. Constraints in meeting fundamental and supplementary qualitative characteristics of financial

A. should be ignored when considering forecasts.

55. Mizuho Machines has the following balance sheet items:

Based on this information, Mizuho Machines’ quick ratio is closest to:

A. investing cash flows under both IFRS and US GAAP.

Month Units Purchased Purchase Price Units Sold Sale Price

A. PHD’s net assets will decrease.

A. Protection for regulators.

A. amortized over its useful life.

A. GBP 192 million

Sale price $1.80 per unit

Based on this information, the breakeven level of revenues is closest to:

Year ΔGDP Δ$ GDP − GDP $V − $V

A. there are more equity issues.

A. ETFs are more tax-effective.

(i) focus on enterprise risk management

A. Only (i), (ii), and (iv) are correct.

A. borrowing and investing in Asset E.

Expected Return Variance Correlation with